How to back top UK stocks and funds tax-free even without a British ISA

Investors may not be getting a dedicated British ISA but that there are still strong arguments for investing in home-grown stocks and funds within the existing tax wrapper.

Plans for a British ISA had been planned to much fanfare under the Tory government but there are now suggestions that chancellor Rachel Reeves will scrap the plans for the product in her October Budget.

The idea of a British ISA had a mixed reception anyway due to concerns about diversification, not to mention it would add to the complexity of ISAs.

But while there may not be an extra £5,000 as promised to invest in the UK tax-free, there are still ways to invest in funds and shares with a domestic focus through your current £20,000 ISA allowance.

Jason Hollands, managing director of Bestinvest, says he was never convinced the British ISA would generate the "game-changing demand" for UK equities that some argued for.

But he adds: "If we see steep increases in CGT or dividend taxes in the Budget, I doubt investors will be celebrating the snuffing out of what would have been an extra tax free allowance.

“Of course, you can still invest in UK equities within the core, £20k annual ISA allowance and given most people don’t fully use this, there is plenty of scope to create their own ‘British ISA’ within it.”

Here is what to consider if you want to back Britain in your ISA.

Is it worth investing in the UK?

Investing in the UK may well have benefits, with the FTSE 100 recently reaching record highs.

But the main UK stock market has been let down by a lack of exposure to technology in recent months.

That means investors solely-focused on the UK may have missed out on the gain of brands such as the Magnificent 7.

Industry data throughout much of this year has highlighted net outflows from UK funds.

Calastone’s latest Fund Flows index showed UK-focused equity funds saw net outflows of £510 million in August, while Investment Association figures highlight £8 billion of withdrawals so far this year.

This is reflected on investment platforms.

Emma Wall, head of investment analysis at Hargeaves Lansdown, says trends such as technology mean equity investors have been favouring US equity funds as well as some global funds.

This is also reflected on the Bestinvest platform.

“We’ve seen a decisive shift in demand towards global funds and US equity funds over the past decade, reflecting the allure of high returns from sectors that are under-represented on the UK market like technology and communication service which are major components of the US market,” adds Hollands.

But there are signs of a change in sentiment though, especially with technology sell-offs in recent weeks, with brands such as Nvidia being hit by share price falls.

Some investors appear to already be seeing the UK opportunities.

Data from interactive investor shows Royal London Short Term Money Market has been in its top five most-purchased funds for past three months and in the top 10 for six.

Meanwhile, the City of London investment trust and Greencoat UK Win have also appeared in the top 10 for the past six months.

Wall says UK equity funds may not be making the top 10 for sales on Hargreaves Lansdown but is back in the top 20.

“There is a real value opportunity in the UK,” she says.

“We have been messaging clients about the diversification benefits for a long time.

“The UK being tech-lite as markets narrow in the US is a real benefit.”

Ben Yearsley, director of Fairview Investing, says UK equities look cheap by many metrics,

He highlights the 12-month forward price-to-earnings (PE) ratio is 11.8 versus an average of 13.4 over the past decade.

“Labour’s victory leaves a stable political landscape for at least five years, probably closer to ten in reality,” he says.

“From better or less fraught relations with the EU, to a lower turnover of ministers leading to more stable policy, these factors all add to a better backdrop for UK equities.”

The top UK equity funds for your ISA

Wall says a lot of UK-listed companies benefit from having little to no debt and pay stable dividends.

“It is a part of the market that has been unloved but shouldn’t be overlooked,” she says.

For a mix of large cap value income and growth, she suggests the Artemis Income fund and Royal London Smaller Companies.

Artemis has a “quality value bias,” she says, while the Royal London takes a bit more risk but provides “growth elements.”

Hollands suggests considering Artemis UK Select and Liontrust UK Growth, which both favour stable large and mid-cap companies.

Alternatively, for a bit more risk, he highlights Fidelity Special Values, which finds unloved companies with unrecognised turnaround prospects.

“Although UK equities have been somewhat unloved in recent years, there are good reasons to reconsider investing in UK equities: valuations are cheap, dividend yields are attractive and share buybacks are very high,” adds Hollands.

“With the new government indicating they want to reform pension funds to unlock more capital for UK assets, this could also drive a reappraisal of UK equities.”